Implementation of the most significant amendment to China’s
insurance law in seven years is days away, and for insurers it will
bring increased regulatory challenges and opportunities. However,
although expert comment is generally positive there are notable
reservations on implementation of the new law.
Some seven years in the making, China’s New Insurance Law comes
into force on 1 October, bringing with it wide-ranging changes to
the regulatory and operational landscape of China’s insurance
industry.
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First enacted in 1995 the Insurance Law of the People’s Republic of
China was significantly amended in 2002 to comply with World Trade
Organisation requirements. It was subsequently the subject of
extensive debate and consultation culminating in adoption of the
second major amendment in February this year to create what is
generally referred to as the New Insurance Law (NIL).
In a review of the NIL Luming Chen, a partner at international law
firm Jones Day, and Lian Lian, an associate at the firm, explained
that legislators have four primary objectives:
• Increased protection of the rights of the insured;
• Strengthen regulatory supervision of insurers;
• Broaden the business scope of insurers; and
• Establish a higher standard for the industry.
With respect to rights of the insured Chen and Lian stressed that
unlike the current law one of the important things the NIL does is
provide a specific deadline for an insurer to settle a claim. This,
they explained, addresses the many complaints from policyholders
about this lack of mandatory time limits and resulting abuses by
insurance companies.
Specifically, the NIL provides that when a policyholder files a
claim with supporting documents, the insurer may request additional
information only once, if it believes that the file is not
complete. In the past, the insurer could effectively delay the
claim process by asking the insured to provide additional documents
again and again, said the authors.
The insurer must complete its verification process within 30 days
after receipt of the insured’s claim irrespective of its complexity
and must pay the insurance money in 10 days after the agreement
with the insured.
If the insurance company decides to turn down the claim, it must
inform the insured in writing of the decision with reasons within
three days after the verification process. Failure to comply with
any deadline wi ll leave insurers liable to pay claims in full and
indemnify the insured or beneficiary for losses resulting from
delay in settling their claim, according to Monica Dang, a general
manager at US insurance brokers Lockton Companies’ Singapore
office.
One change working in insurers’ favour is that the NIL shortens the
statute of limitations from four years to two years within which an
insured must file a claim from the day when he or she knows or
should have known the occurrence of the insured incident. The aim
of this change is to prevent insurers wasting valuable resources to
deal with old claims, explained Chen and Lian.
Strengthening supervision
Another key objective of the NIL is to enhance the insurance
industry’s stability with most of the emphasis in this respect
placed on extending the China Insurance Regulatory Commission’s
(CIRC) powers. Under the NIL the CIRC will be able to impose firmer
regulation of insurers in terms of criteria for company setup, new
branch office approval, employment approval for senior management,
compliance requirements and solvency issues.
Expanding on the CIRC’s wider powers Chen and Lian noted that if an
insurance company is financially unstable, it will be put on
probation for correction by CIRC. The CIRC may also impose certain
measures on an insurer such as compelling it to increase its
registered capital and in extreme cases take control of an insurer
in serious financial difficulties.
Another important aspect of the CIRC’s extended powers deals with
transactions between insurance companies and their shareholders, an
issue that Chen and Lian stressed has long caused serious conflict
of interest problems. Addressing this problem, the NIL requires
insurers to set up an effective management and disclosure systems
for affiliated transactions.
The new law also empowers the CIRC to compel an insurance company
shareholder that has undertaken affiliated transactions harmful to
the solvency of the company to take corrective actions. In extreme
cases the CIRC could also compel the errant shareholder that fails
to take corrective actions to sell its shares in the insurance
company to a third party.
The NIL also addresses one of the most serious impediments facing
insurers: restricted investment options which has resulted in a
significant proportion of insurance premiums being invested in
Chinese treasury bonds and bank deposits. Chen and Lian noted that
the NIL will “significantly expand investment options” for
insurers.
For example, under the NIL insurers will be permitted to invest in
what the legislators term “immovable assets.” The CIRC is
authorised under the NIL to draft rules relating to immovable
assets, which appears to refer to fixed property, and other new
investments.
Another significant change under the NIL removes the requirement
that a direct insurer ceding reinsurance gives Chinese reinsurers
preference.
Delivering on expectations
Assessing the NIL Chen and Lian observed that it is “reasonably
expected to meet its intended goals and that well-thought and
effective a set of implementation rules is expected to be adopted
to make the new law work effectively.
However, adding a caveat Chen and Lian cautioned that the NIL is
still quite general in many places and it remains to be seen how
the enabling implementation rules will make the new law work
effectively.
They pointed to issues to be addressed such as how to resolve
conflicts between the old and new laws, and how and where the new
law will be applied retroactively. Chen and Lian believe resolution
of these issues will most likely be through judicial
interpretations on particular issues by the Supreme People’s
Court.
As a concluding remark Chen and Lian noted that the CIRC has been
granted even greater regulatory powers under the NIL.
“It remains to be seen whether it will have sufficient expertise
and manpower to do the job that the legislature has intended it to
do,” they cautioned.
